An extremist, not a fanatic

November 25, 2011

Clegg's youth con

Nick Clegg says his Youth Contract will “provide hope” for the young unemployed. He omits to add that it will provide a nice little earner for employers.

He plans to give 160,000 subsidies of up to £2275 for businesses who take on an 18-24 year-old from the Work Programme.

I’ve got four problems here.

1. To some extent, this is paying firms to do what they would do anyway. Remember that even in a weak labour market, hundreds of thousands of jobs get created. In Q3 of this year - a time when net employment slumped - 977,000 people (pdf) moved into work. In other words, even in bad times, employers take on loads of people. Clegg is thus giving them money for what they are already doing. It’s corporate welfare.

2. At the margin, the subsidy will encourage firms to take on more youngsters in the Work Programme. But to a large extent, they’ll do so by hiring workers eligible for the subsidy at the expense of those ineligible ones - that is, the shorter-term young unemployed and the over-24s. Opportunities for the young long-term unemployed will thus improve, at the expense of others.

3. This is not a fiscal expansion. The BBC reports that the scheme might be financed by cuts in tax credits. But lower tax credits mean lower consumer spending and hence less employment of young people.

4. This scheme is not simply about expanding the opportunities for young people. The Telegraph reports:

Teenagers “failing to engage positively” with the Youth Contract and take up job placements could be forced to accept them. Those dropping out of the programmes might have their benefits removed.

There’s an asymmetry here. Whilst there’s an element of compulsion for the young unemployed, there seems no such compulsion upon firms to retain young workers when the subsidy runs out.

Which is no accident. I suspect that this scheme is much like the unlamented YTS of the 1980s - a way for employers to get subsidized cheap labour. But then, it has long been the case that one function of the state in capitalist society is to act as a human resources department, ensuring a supply of cheap and malleable workers.

Another thing: for some more serious ideas of what to do about youth unemployment, check the work of David Bell, such as this.

No 1 is always a problem. To take a silly example, a baked beans subsidy would subsidise the consumption of tons of beans that would have been consumed anyway.

Also the exchequer costs here should not be confused with REAL or RESOURCE costs. Where £X of subsidy is directed at someone who would have been employed anyway, that is an exchequer cost, not a real cost. In contrast, the administration costs that a subsidy involves are real costs.

No. 2 (displacing other employees) – this is a problem with all subsidies.

Re No. 3, no employment subsidy of itself ever is fiscal expansion. The merit of employment subsidies is that they aim to reduce NAIRU, or improve the unemployment / inflation relationship, and that in turn facilitates fiscal expansion (or monetary expansion)